How Replacement Cost Insurance Works

man and woman repairing home after damage

You expect your home insurance policy to help you rebuild your home if it ever gets damaged, to replace your personal belongings — your favorite set of rocking chairs, your appliances and all of your smart home gadgets. But all coverage isn’t created equal, and how much you receive to rebuild depends a lot on what type of coverage you have: Whether it’s replacement cost insurance or actual cash value insurance.

To make sure you have the coverage you need, let’s talk about what replacement cost insurance is and how much coverage it provides, as well as ways to extend your coverage.

What is replacement cost insurance?

Luckily, most homeowners insurance policies include replacement cost insurance. This comprehensive type of coverage within your policy pays you to repair or replace your home and your belongings if some covered peril damages them in your policy (things like lightning, fire, theft, falling objects, etc.). As long as replacement costs stay within your policy limits, you don’t have to pay anything out of pocket. 

Less common, some insurance companies instead offer actual cash value insurance. This lower-cost policy provides less coverage and could require you to pay quite a bit out of pocket to replace your home and belongings. (Be sure to take a peek at your insurance declaration page to determine which type of coverage you have.) 

Key takeaways:

  • Replacement cost insurance pays you to repair or rebuild your home to how it was before a catastrophic event. It also pays to replace your damaged, destroyed or stolen personal belongings with new items of similar quality. 
  • Actual cash value insurance pays you the depreciated value of your personal belongings, which is less than what you bought them for and likely not enough to replace them entirely. 

Replacement cost insurance vs. actual cash value insurance 

Actual cash value (ACV) insurance pays you the amount your property is worth when it’s damaged or destroyed. Since most personal belongings depreciate — meaning they become less valuable over time — you would expect to receive a lower payout with ACV than with replacement cost coverage. 

Many insurance companies require you to have enough dwelling coverage to replace your home and structures on your property fully. As for your belongings, it’s usually up to you whether you want replacement cost coverage or ACV coverage. 

When determining how much coverage you need, keep in mind that replacement cost coverage costs more than ACV. However, it can be critical to help you rebuild your home and replace your belongings without dipping too much into your savings.  

How does replacement cost insurance work?

Let’s say a falling object damages your wooden front door. If you have replacement cost insurance, you’d expect your insurance company to cut you a check to replace the door with one of similar quality — not a fiberglass or steel door, for example. 

You should take videos of any damage to your home to quickly and easily file claims with your insurance company. Similarly, you should provide your insurance company with a list of any damaged items, when you purchased them, how much, any photos that you have and original receipts if you have them. (For a handy way to keep track of your items and how much they’re worth, check out our emergency preparedness item tracker.) 

Your insurance company will likely follow a two-step payment process. First, you will receive the ACV of your items up front. You’ll then receive the rest of your payment (the difference between the replacement cost and the ACV) after replacing your items or rebuilding your home. (Some policies allow you to receive the full replacement value of your home without replacing anything, but these are more expensive.) 

Replacement cost insurance aims to replace your belongings with new ones of similar quality. So it is important to note that there could be some wiggle room to negotiate with your insurance company if there isn’t an exact replacement for your items.

Replacement cost insurance limitations 

Replacement cost coverage can help you rebuild your home and replace your damaged belongings with new ones — up to a certain point. Here are some coverage limitations that you should be aware of, as well as ways to extend your coverage. 

Guaranteed and extended replacement coverage 

Let’s say your home’s replacement cost is $400,000. If a tornado destroys your home, and you have replacement cost insurance, you might expect to receive $400,000 from your insurance company to rebuild. However, you might need more than that if, for example, your entire town was affected by the tornado and the cost of construction materials and labor rises. 

That’s when it’s helpful to have extended replacement cost coverage. This rider to your policy offers more coverage on a percentage basis — usually 10–50%. In our example above, if you insure your home for its replacement cost of $400,000, and you have a 25% extended replacement cost coverage plan, your home would really be insured for $500,000. 

If you want even more coverage, you might opt for guaranteed replacement coverage, which repairs or rebuilds your home and replaces all of your belongings, regardless of the costs. 

Key takeaways:

  • Extended replacement coverage typically gives you 10–50% more coverage to rebuild your home after a catastrophic event.  
  • Guaranteed replacement coverage pays to rebuild your home and replace your belongings, regardless of how much it all costs.  

Scheduled personal property coverage 

There are also policy limits on replacement cost coverage for your personal belongings — particularly your valuable ones. Standard policies often don’t fully cover electronics, jewelry, musical instruments, outdoor equipment, special collections or any items that are worth a lot of money. For full coverage over these items and the like, you should consider scheduled property coverage

How to estimate the replacement cost of your home

It’s best to make sure that your home’s insurance covers the full replacement cost and that the replacement cost is accurate. 

Your home’s replacement cost depends on its age and style, how big it is, any improvements you made, local construction costs and many other factors. It’s not the same as your home’s current market value, which depends on the real estate market.

A quick formula to help you estimate your home’s replacement cost is to multiply your square footage by your local construction costs per square foot. To find the average construction cost per square foot in your area, plug your ZIP code into an online calculator

Estimate your home’s replacement cost by multiplying your square footage by your local construction costs per square foot.

Your insurance policy must work for you so that you’re not surprised by out-of-pocket costs if you ever have to rebuild your home or replace your belongings. We’re proud to offer full, non-depreciated replacement coverage for your belongings on most of our policies (this is the case unless a state requirement allows someone to underinsure), as well as 25% enhanced rebuilding coverage just in case construction costs increase after a catastrophic event. Those are only two of the ways Hippo continues to reinvent modern home insurance.